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CONVERTIBLE PROMISSORY NOTE
MENDOCINO BREWING COMPANY, INC.
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Name of Issuer: Mendocino Brewing Company, Inc.
Dated:
March 2, 2005
Maturity Date: September 1, 2006
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1. PROMISE.
Mendocino Brewing Company, Inc., a California
corporation having its principal office at
1601 Airport Road, Ukiah, California
95482 and any successor (the "Company"),
for value received, promises to pay to
United Breweries of America Inc., a
Delaware corporation or to its registered
successors or assigns (the "Holder") the
principal sum of Four Hundred Thousand
Dollars ($400,000.00) on presentation and
surrender of this Convertible Note
("Note") on August 31, 2006 (the "Maturity
Date"), and to pay interest on that
principal sum at a rate equal to the lesser
of (i) one and one-half percent
(1.50%) per annum above the prime rate
offered from time to time by the Bank of
America in San Francisco, California, or
(ii) ten percent (10%). Interest
payments shall be paid quarterly on the
first day of the months of April, July,
October, and January of each year. The
Company may use any of the funds borrowed
from the Holder for any corporate purposes
of the Company, including paying
obligations owed by the Company to the
Holder.
2. FORM OF
PAYMENT. All payments under this Note shall be made in
lawful money of the United States of
America. The Company waives diligence,
presentment, protest, demand and notice of
protest, dishonor, and nonpayment of
this Note.
3.
CONVERSION/REDEMPTION/RENEWAL.
(a)
The Holder has the right, at the holder's option, at any
time on or after the Maturity Date, to
convert all or any portion of this Note
into fully paid and nonassessable shares of
common stock ("Common Stock") of the
Company at the rate of one share of such
Common Stock for each One Dollar and
50/100 ($1.50) (the "Conversion Rate")
principal amount of this Note and any
accrued but unpaid interest. The Holder
agrees that all shares of Common Stock
of the Company, issued by the Company upon
the conversion of all or any part of
this Note shall be restricted securities
within the meaning of Rule 144(a) of
the Securities Act of 1933.
(b)
The conversion right set forth in this Section 3 is
subject to any adjustment of the Conversion
Rate set forth in Section 5 and
Section 6, and is only exercisable upon the
surrender of this Note for
conversion at the office or agency to be
maintained by the Company accompanied
by instruments of transfer, in form
satisfactory to the Company, duly executed
by the registered holder. No fractional
shares are issuable on any conversion,
but in lieu of issuing fractional shares
the Company shall pay for such
fractional shares in cash.
(c)
At any time prior to seventeen (17) months from the date
of this Note, the Holder may provide
written notice to the Company requiring the
Company to commence repayment of the
outstanding principal balance of this Note,
together with any accrued but
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unpaid interest thereon, to the Holder. In
such case, commencing on the Maturity
Date, Company shall pay the Holder equal
monthly installments of principal,
together with any unpaid interest, over a
period of five (5) years until all
amounts due hereunder shall be repaid in
full.
(d)
If the Holder does not convert or redeem any or all of
the principal amount of the Note into
Common Stock on the Maturity Date, the
Holder has the right to extend the term of
this Note for a period of time
mutually agreed upon between the Holder and
the Company. At any time during such
extension period, the Holder shall have the
right to convert all or any part of
the outstanding principal amount of the
Note plus accrued and unpaid interest
into Common Stock as set forth in this
Section 3. Moreover, at any time during
such extension period, the Holder shall
have the right to require the Company to
repay all or any part of the outstanding
principal balance of this Note,
together with any accrued but unpaid
interest thereon, to the Holder within
sixty (60) days.
4. COMPANY
REDEMPTION. Prior to the Maturity Date, this Note may be
redeemed by the Company, in whole or in
part, at any time after sixty (60) days
written notice ("Redemption Notice") to the
Holder. During such sixty (60) day
period, the Holder shall have the right to
convert all or any part of the
outstanding principal amount of the Note
plus accrued and unpaid interest into
Common Stock, as set forth in Section 3. If
the Holder does not convert all
outstanding amounts into Common Stock, the
Company may redeem any remaining
amounts at any time during a thirty (30)
day period commencing with the date of
expiration of the sixty (60) day period
provided for in the Redemption Notice.
Thereafter, the Company shall be required
to provide the Holder with a new
Redemption Notice, and the Holder shall
have a new sixty (60) day period within
which to convert all or any part of the
outstanding principal amounts plus
accrued and unpaid interest into Common
Stock, as set forth in Section 3.
5.
ANTI-DILUTION.
(a)
If at any time there is a capital reorganization of the
Company's Common Stock, including any
combination, reclassification, exchange,
or subdivision of shares, a merger or
consolidation of the Company with or into
another corporation, or the sale of all or
substantially all the Company's
properties and assets as, or substantially
as, an entirety to another person,
then, as a part of such reorganization,
merger, consolidation, or sale, lawful
provision shall be made so that the Holder
shall thereafter be entitled to
receive on conversion of this Note, during
the period specified in this Note,
the number of shares of Common Stock of the
Company, or of the successor
corporation resulting from such merger or
consolidation, to which a holder of
the Common Stock deliverable on conversion
of this Note would have been entitled
on that event if this Note had been
converted immediately before that event. In
any such case, appropriate adjustment (as
determined by the Company's board of
directors) shall be made in applying this
Note to the rights and the percentage
interests of the Holder after the
reorganization, merger, consolidation, or sale
to the end that this Note (including
adjustment of the Conversion Rate) shall be
applicable after that event, as near as
reasonably may be, in relation to the
shares of Common Stock deliverable after
that event on conversion of this Note.
The Company shall, not later than thirty
(30) days prior to making such
adjustment, give written notice ("Notice")
by courier to the Holder at the
address of Holder shown on the Company's
books.
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(b)
Any Notice that is sent pursuant to Section 5(a) shall
set forth, in reasonable detail, the event
requiring the adjustment and the
method by which the adjustment was
calculated and shall specify the Conversion
Rate then in effect after the adjustment
and the increased or decreased number
of shares of Common Stock to be received
upon conversion of this Note. When
appropriate, advance notice may be given
and included as part of the notice
required under other provisions of this
Note.
6. CONVERSION
RATE PROTECTION.
(a)
If at any time, or from time to time, the Company issues
or sells shares of Common Stock without
consideration or for a consideration per
share less than the Conversion Rate in
effect immediately before that issue or
sale, then and in each such case:
(i)
the Conversion Rate then in effect and the
Conversion Rate applicable for any
subsequent period shall be adjusted to a
price (calculated to the nearest cent)
determined by dividing: (y) the sum of
(aa) the number of shares of Common Stock
outstanding immediately before that
issue or sale multiplied by the Conversion
Rate in effect immediately before
that issue or sale, plus (bb) the
consideration, if any, received by the Company
on that issue or sale, by (z) the number of
shares of the Company's Common Stock
outstanding immediately after that issue or
sale; and
(ii) the
Holder shall after that issue or sale, on
conversion of this Note, be entitled to
receive the number of shares of Common
Stock equal to the numbe
